UPDATE 2-Vodafone buys Telstra's NZ outfit, Telecom NZ at risk

July 12, 2012|Reuters

* Telstra sells NZ business for NZ$840 mln ($670 mln

* Combined entity seen tougher competitor for Telecom

* Some analysts see potential takeover risk for Telecom

By Naomi Tajitsu

WELLINGTON, July 12 (Reuters) - Australia's Telstra will sell its struggling New Zealand operations to Britishmobile operator Vodafone in a NZ$840 million ($670 million)deal, threatening Telecom New Zealand's dominance andpotentially making it a future takeover target.

Under the sale, Vodafone New Zealand said it will acquireTelstraClear's fixed-line and Internet operations, which holdonly 16 percent of New Zealand's broadband market but will nowhave the muscle to compete head-on with much larger Telecom.

The deal also cuts Telstra free from the revenue-poor assetand opens the door to a possible takeover of Telecom down the line by its Australian counterpart, as the New Zealandcompany faces the daunting task of expanding in an alreadymature market.

It will give Vodafone, which competes with Telecom in NewZealand's mobile market where both hold a 40 to 50 percentshare, a stronger foothold in fixed-line services with around 30percent of the fixed-line broadband market. Telecom currentlycontrols just over half of that market.

Vodafone will also be better able to compete with Telecom inbuying access to ultra-fast broadband, which is expected to berolled out in New Zealand by 2019.

Telstra shares rose to a 3 1/2-year high of A$3.89 after theannouncement before turning lower to end down 0.3 percent.Telecom shares rose 2.2 percent on Thursday, recoveringfrom an initial dip. New Zealand's benchmark stock index was up 0.6 percent.

TURNAROUND CHALLENGE

Few in the market expect Vodafone's strengthened positionwill immediately shake Telecom's market dominance, givenTelstraClear's weak position and declining revenue, which sagged3.8 percent in the six months to December.

Vodafone, which expects regulatory approvals for the deal tobe completed late this year, will also have to rein in capitalexpenditures, which have risen due to the costs of rebuildingTelstraClear's network infrastructure in Christchurch, one ofits major hubs which was devastated by an earthquake in 2011.

But some industry experts believe Telecom may eventuallystruggle to compete with Vodafone's global scale and aggressivestrategies, and would not rule out the possibility thatcash-rich Telstra may swoop in on Telecom in the future if theNew Zealand company's fortunes wane.

"Telecom would have a very, very difficult time movingforward with a strengthened Vodafone. That may further build thecase for an integration of Telecom NZ and Telstra,"Australia-based independent telecoms consultant Paul Budde said.

He added that combining Telstra and Telecom was sensiblefrom a cost perspective, given the lack of room to expand in NewZealand's small yet mature market.

"It makes sense to integrate Telstra and Telecom because inthe end it's about cost savings, which would be possible if thetwo were merged," Budde said.

Vodafone on Thursday said the TelstraClear sale included arestraint of trade clause, which would bar Telstra fromre-entering the New Zealand market, although it did not say forhow long.

The NZ$840 million price tag was more than double marketexpectations for roughly NZ$400 million, and analysts saidVodafone appeared willing to pay a premium for the benefits ofTelstraClear's network assets and customer base.

Fraser McLeish, an equities analyst at RBS in Sydney, said the sale dovetailed with Telstra's strategy to generate A$2billion to A$3 billion ($1.95-2.93 billion) of free cash overthe next three years.

"This really adds to that cash that's available to return toshareholders or potentially for some acquisitions," he said,adding that Telstra had mentioned interest in picking up assetsrelated to network applications and services.